There’s no doubt about it — the nation’s major banks are (mostly) strong enough to survive a significant recession, at least according to the Federal Reserve’s now-annual “stress test.” Fed Chairman Ben Bernanke et al said 15 of the 19 banks that underwent the scrutiny this year would indeed be able to stave off an economic contraction without the need for a capital injection, which is a heck of a lot better than the roughly 50% passing rate we saw back in 2009.

And of course, the stronger financial position meant the Fed also allowed several of these banks to up their dividend payouts … one of the traditional reasons investors own bank stocks.

Even for banks that weren’t allowed to raise their dividends, though, the sheer fact that banks — as a whole — are getting healthier prodded a rally that still hasn’t stopped. The SPDR S&P Bank ETF (NYSE:KBE) is up nearly 9% between the Fed’s announcement last Monday, led by names like Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Well Fargo (NYSE:WFC).

However, this widespread rally might be a case where even an undeserving stock was swept up in the bullish mania.

What the Stress Test Wasn’t

The connection investors made between passing the Federal Reserve’s so-called stress test and that bank being “investment worthy” might have been an errant one.

The test was designed to — and only designed to — determine if that bank would survive an economic hardship similar to the one faced in 2008. Although other factors might have been discussed, when it was all said and done, the Fed’s only real concern was each bank’s balance sheet … the one accounting statement that’s of the least concern to investors.

In other words, profits, earnings growth, revenue and all the other stuff that drives stocks higher or lower wasn’t part of the stress test — even if the market acted as if it was.

To be fair, most of the banks that passed the most recent round of testing are attractive companies, and six of them already have raised their dividends with the blessing of the Fed. The improvement wasn’t universal, though. While Bank of America was one of the banks that technically passed the test, it has not been growing earnings. It has not been growing revenue. In fact, even turning any profit at all has proven to be an iffy proposition. Yet, BAC shares have been rallying side by side with the rest of the industry’s stocks.

How long can BofA’s rally run on fumes? Great question — but odds are the market is going to figure out the emperor has no clothes sooner than later.

By the Numbers

On a pure balance sheet basis, Bank of America doesn’t look all that different than its peers. It has about 12% more assets than liabilities. On a year-over-year basis, Q4’s $29.6 billion in revenue is better. And last quarter’s net income of $1.99 billion certainly looks better than the $1.2 billion loss take in the fourth quarter of 2010.

Bluntly, though, those are cosmetic improvements, and hardly tell the whole story.

Last year, Bank of America saw revenue decline by 14%, adding an alarming footnote to 2011’s swing back to a profit. And although the bank did clear a profit last year, it has not been a consistent one. The relative knockout punch, however, came in the form of BofA’s decision to not even bother asking to raise its dividend. Any bank that wanted to increase its payout needed the Federal Reserve to approve it first, and rather than being embarrassed by being told “no,” Bank of America kept quiet.

Said another way: It might have passed the stress test, but Bank of America shouldn’t inherently be passing investors’ smell test. It has so far, but sometimes the market can take a while to work off the euphoria.

Even the Stress Test Results Are Questionable

Despite passing the stress test, questions have surfaced about BofA’s actual ability to survive another major recession.

The Fed said the bank’s liabilities wouldn’t exceed $60 billion, even under the most adverse of economic conditions. Others know there’s more to the story than the bank’s balance sheet, though. Bank of America has been dogged — more so than its peers — by loan losses, yet still is sitting on more than its fair share of them. Add in legal costs that stem from a still-ugly mortgage portfolio, and the bank’s actual potential liability is estimated by some to be as much as $80 billion … a figure that likely would require a capital rescue.

Given that so many other banks passed the stress test with flying colors, BofA is a name investors simply might not want to bother with until more substantial improvements are logged.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.